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Secured Transactions
John Marshall Law School, Chicago
Kilborn, Jason J.

1.     Transaction, regardless of form, that creates a security interest in personal property or fixtures by contract – to secure payment or secure performance of an obligation.  UCC 9-102 (37)
2.     Lien
a.     A “connection” or a “tie” that “binds” a debt obligation to moveable property/ collateral
                                          i.    K that creates rights in property
                                        ii.    There’s a connection between the debt and a source of value.
b.     If the debt goes unpaid, the C can swoop in and take the collateral to pay the unpaid debt.
3.     Collateral
a.     What the lien attaches to.
b.     If D defaults, C can follow the lien to the collateral to get value out of the collateral.
c.     K’ual agreement – grants an interest in the property.
d.    Makes C’s more likely to make loans, and facilitates commerce. We want to make commerce flow.
4.     Purposes of getting secured:
a.     (1) Advantage against the D
                                          i.    If D doesn’t pay, you’ll take/foreclose on the collateral, incentivizes D to pay C.
5.     1/1-203(b) – Lease distinguished from security interest
a.     A transaction in the form of a lease creates a SI if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
                                          i.    (1) the original term of the lease is equal to or greater than the remaining economic life of the goods;
                                        ii.    (2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
                                       iii.    (3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement;
1.     Option to renew AND no additional consideration OR nominal additional consideration.
                                       iv.    or (4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
1.     Nominal – have to look at context. If it’s completely unlikely that the thing will come back to seller/lessor, then it’s not a lease.
b.     Part I:
                                          i.    Lease must go to the end of its term (can’t be terminated by lessee), and then…
c.     Part II:
                                          i.     (1)-(4) must happen for it to be a security interest.
d.    If you’re trying to structure the deal so that the property will never come back to you, that’s a sale.  A lease is sending property away from you and expecting it to come back.
e.     If lessor bears risk that the goods will come back after the lease, then that’s a true lease.
f.      Lease is not a SI.
6.     Secured claim vs. unsecured claim in BK
a.     SC have major advantages in BK over USC:
                                          i.    Entitled to the value of the collateral.
1.     BK recognizes that reservation – matter of constitutional law.
2.     Will be paid in full or paid more –can continue accrue interest and fees even after BK is filed.
a.     Unsecured creditors – their claim freezes as soon as the bankruptcy case commences (automatic stay).
3.     The law in bankruptcy treats a claim as secured only to extent that there’s collateral value behind it.
                                        ii.    Bifurcation:
1.     Portions that backed by collateral value (secured) and those that aren’t (unsecured).
2.     Secured – entitled to the full value.
b.     Secured creditors can secure up to the price of the collateral. Unsecured creditors can’t do this.
                                          i.    Unsecured creditors can only get the present value of the stream of payments debtor owes in order for debtor to keep collateral.
ATTACHMENT (creation of a security)
1.     Security interest attaches to the collateral, as soon as it is enforceable against the debtor and third parties with respect to the collateral, when three requirements are met.  ALL THREE MUST BE MET:
a.     First: value must be given
                                          i.    Section 9-203 (b) (1) does not say who must give value, the assumption is that it’s the creditor. 
                                        ii.    What constitutes value?
                                       iii.    Section 1-204 defines the word value (anything of past and present is value)
1.     Value is usually an advance of money or a delivery of goods. 
                                       iv.    Future value – a future promise to give value only if it is a binding commitment.
b.     Second: debtor has rights in the collateral
                                          i.    Basically, you can’t give away someone’s rights, and you can’t give away what you don’t have.
                                        ii.    Exception: you can give away those rights in anticipation of rights occurring.  (For instance, I’m going to get a truck from Toyota, which I have ordered specially).
                                       iii.    Can grant security interest in leasehold, or limited interest, in property. Don’t need to be the owner, but just need some right in the collateral. That right is all debtor can give away.
c.     Third: the debtor must have authenticated the security agreement that describes the collateral.
                                          i.    Reasonably identify the collateral, doesn’t have to be overly specific; super generic descriptions such as “all of debtor’s assets” or “all debtor’s property” are not sufficient for the security agreement.
                                        ii.    “I describe the following described collateral to secure the described debt, and I secure that debt. Signed: debtor.”
                                       iii.    Authenticated: signed
                                       iv.    Modern trend – even electronic forms ok.
                                         v.    This third requirement can also be satisfied by having possession or control of the collateral.
1.     If the secured party has possession of the collateral to which the security agreement attaches, an authenticated record of a security agreement is NOT required.
2.     Control
a.     Deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights.
3.     A security agreement is still necessary for attachment, but it may be oral since the collateral is a pledge – UCC 9-203 (b) (3) (b)
                                       vi.    No requirement that the security agreement mentions what debt is secured – it just says you need to describe the collateral.
1.     Don’t care about the loan
2.     Composite document doctrine
a.     Don’t just look at one document. You look at all the documents to see if the debtor had intent to presently grant a security interest.
b.     It looks bad for the lawyers in the deal. You can write a security agreement on the back of a napkin, and if you haven’t done that then it looks really bad.
3.     Security interest as to after-acquired collateral – UCC 9-204
a.     Security agreement may create or provide for a security interest in after-acquired collateral
b.     After-acquired collateral must be provided for in the security agreement
c.     Security agreement must contain sufficient description of the after-acquired collateral under UCC 9-108, but you don’t need to write “after-acquired property” – it can be inferred from the nature of the collateral.
d.    Security interest does not attach in the after-acquired property until the debtor obtains rights in the after acquired property.
e.     Exception: A security interest does not attach to after-acquired property if the property is:
                                          i.    Consumer goods UNLESS debtor acquires rights within 10 days after the creditor gives value UCC 9-204 (b) (1) OR
                                        ii.    Commercial tort claims UCC 904 (b) (2)
f.      Some things are assumed to turnover – they have an inherent after-acquired element
                                          i.    Crops
                                        ii.    Inventory
                                       iii.    Accounts
                                       iv.    If you have something that inherently turns over, then we’ll assume it granted property after-acquired.
4.     Security interest as to future advances – UCC 9-204 (c)
a.     A security agreement may provide for future advances
b.     The security must mention the future advances. 
5.     Describing the collateral
a.     9-108: agreement must reasonably identify the collateral.
b.     Can’t describe the collateral as “all the debtor’s property.” You have to string together the description of all the categories listed in A9.
6.     There’s no limitation in taking a security interest in any type of collateral – we don’t care what you get a collateral in.
a.     There’s no equivalency requirement. The collateral can and should vastly exceed the amount of the debt being secured, because who knows what will happen with that value over time. If the value deteriorates, you want something left over. We don’t limit the amount of value that a collateral can encumber.
1.     Proceeds: value that is a transformation or addition to the original collateral.
a.     Is that other stuff encompassed within the security agreement?
2.     Most agreements include explicitly value-tracing concepts that try to cover any way the collateral transforms into another source of value without adding to the value of the collateral.
a.     Collateral changes in form, but keeps the same value, so we want to capture the new form.
3.     Value tracing concepts
a.     Proceeds, products, rents, profits, and offsprings.
4.     Proceeds defined: UCC 9-102(64)
a.     Anything acquired upon di

and aircraft parts
1.     Federal Aviation Act – preempts UCC
2.     Need to file it in OK City with the FAA office.
3.     Watercraft – ship 5 net tons or more
a.     File ship mortgage with US Dept. of Transportation.
                                       iii.    (3) Things that run on public roadways (cars, trucks, bikes) and things on public waterways (boats)
1.     Need certificate of title (to prevent theft).
2.     If state law says these things must be covered by certificate of title, that state will also identify the place where security agreements for those things should be filed, or that there’s no filing regimen at all.
3.     Way to perfect in car, truck, boat: apply to the agency in charge of those certificate of titles and ask them to have your lien noted on face of certificate of title.
a.     DMV
b.     Department of Natural Resources for Boats
4.     Apply to the DMV and have your lien noted on the certificate of title. Once you’ve paid it off – take it to the DMV and have them issue you a clean copy of title.
5.     Exception: if the car, truck, boat is just inventory, then you don’t need to file on certificate of title – just do ordinary UCC.
a.     Inventory/equipment = UCC-1
7.     Alternative methods of perfecting security interest:
a.     The most common way to perfect is by filing UCC-1. But that’s not always the only way AND it’s not always the accepted way. Some things can’t be perfected by UCC-1.
b.     (1) Possession
                                          i.    Collateral in the possession of the secured party.
1.     When the secured creditor takes possession (however most collateral in the US today is non-possessory)
                                        ii.    It’s an alternative method of perfection for any collateral that has a physical embodiment that represents the value.
                                       iii.    Negotiable documents, goods, instruments, money or tangible chattel property.
                                       iv.    Types of property covered: collateral that consists of goods, money, negotiable documents, certificated securities, instruments or tangible chattel paper – UCC 9-313 (a-b)
                                         v.    If the collateral is money, the only way to perfect your security interest is by taking possession.
c.     (2) Control
                                         i.    Collateral in the control of the secured party.
                                        ii.    Control = means what it says in A9.
                                      iii.    1. Deposit (bank) accounts
1.    Control is the only way to perfect an original security interest in a bank account.
a.    This isn’t proceeds. We are talking about the ORIGINAL bank account.
2.    Three ways to get control of deposit account:
a.     (1) If the secured creditor is the bank that maintains the account, then it has control of that account.
                                                                                          i.    Bank in which the deposit account is maintained automatically has control over the deposit account when it makes a loan to a customer using that deposit account as collateral
b.     If creditors other than the bank in which the account is maintained want control, they must use one of two methods:
                                                                                         i.    (2) Creditor gets a control agreement from the bank that maintains the account.
1.    This is the most common.
2.     Having the bank agree in an authenticated record that the bank will follow the instructions of the creditor without further consent of the debtor.  UCC 9-104(a)
a.     Control agreement: bank agrees to follow the creditor’s instructions with respect to the funds in that account. 
                                                                                        ii.    (3) You get your name added to the account as a joint security account holder.
1.    This is an aggressive approach. You have a contractual relationship with the bank because you’re now a customer.